Good decision to increase diesel prices….Congress shows its mettle

The government yesterday decided to increase the price of diesel, ever so gradually, till the total subsidies bill reduces to a specified maximum that it is comfortable with. Further, it gave a hint that prices will keep increasing, albeit gradually; maybe 50 paise or 1 rupee a month till the subsidy objective is met. This decision by itself was quite unremarkable, considering how much anticipation there has already been about it. What was remarkable however was the determination the Congress has shown in an election year to take tough decisions. What was even more remarkable (and distasteful as always) was the pathetic politics and even more pathetic TV journalism that followed.

Let me start with the decision to increase diesel prices first. Diesel cannot be subsidized for ever. Nothing can ever be subsidized for ever. What people – even the educated middle class – don’t understand is that when diesel is subsidized, someone still has to pay for the subsidy. Usually, it is someone other than the actual user of the fuel. The urban scooter driver – the quintessial middle class – who has nothing to do with diesel pays for the subsidy the SUV owner gets. How? In the form of the consequent higher interest rates that affect everything he consumes. And how does this happen? Through a circuitous route. Basically, as subsidies increase, the government has to borrow more, so the fiscal deficit goes up, leading to higher interest rates, affecting everything (not even related to diesel) becomes expensive. This affects the richest (SUV driver) as well as the poorest (in the form of higher consumer prices). The opposite happens when subsidies (and deficit) reduce. Want proof? Diesel prices went up “shockingly” in Sept 2012 (by Rs 5, or some 12%). It has been 4 months since; surely enough time for the full effect to be felt. But inflation has only come down. Its at a 3-year low now at some 7% odd. If prices increase slowly, nothing will even be felt. Except of course, for the cacophony from the opposition and the TV channels!

We don’t give them the credit but our politicians are real smart; unlike our TV anchors who are mostly ignorant. Politicians present one side of the story, as it suits them. They talk of “everything becoming expensive because diesel affects the transport sector” but they don’t talk of the “positive effect of reducing fiscal deficit and hence interest rates” because their job is to attack the ruling party. The job of the opposition is to oppose – so said the great Yashwant Sinha. I guess, one has to assume it implies that logic and reasoning is un-important; only opposing is. But what about our TV anchors who are honest enough to admit that they are not economists, yet have no shame in engaging in discussions with noted experts? Anchors believe their job is to raise froth; and they do just that.

So look at how incongruous the debates are becoming. Had the government not increased diesel prices, it would have been called “soft”, having “one eye on the elections”, “harming the country” in the process. Now that it has increased diesel prices, it is “against the middle class”! When the government increased diesel prices by 5 rupees in one shot, it was a “huge burden on the people”. When it increases prices by less than 1 rupee a month, it is still a “huge” burden! When the price increases by 5 rupees, “inflation will shoot up” (but we know it doesn’t!); when it increases by less than a rupee, “inflation will still shoot up”! When the government doesn’t act, “it is in a paralysis”. When it acts, it is “in a rush”! And most hilariously, when it doesn’t increase prices, it is “taking India to a junk bond status”; when it does, it is acting to “please the ratings agencies”! Ridiculous, irresponsible and condemnable. One of the TV anchors was so puerile as to behave like a rabid bulldog. Looks like he drives an SUV! Fortunately the other anchors were a lot more reasonable, analyzing for a change, and appreciating the courageous decision.

The only ones who had a right to complain yesterday were the Left parties and Mamata’s TMC. They have no qualms about publicly admitting that their economic policies are sepia tinted. They have “I am economically regressive” tattooed on their foreheads. Why blame them? But what about the BJP? The BJP in its time had itself de-regulated diesel pricing. It was a good decision. If the Congress had stayed with it, the price of diesel would have been the same as petrol today. Now when the party is finally undoing its wrong policies, the BJP should have been gloating that the government is admitting it’s mistake. Instead, it is accusing the Congress of increasing prices, and basically adopting a BJP policy! The BJP has the ability to prove again and again that it doesn’t know its *** from its elbow!

Essentially, the BJP doesn’t say it, but what it would like to do is to cut the spending plan. It would like to undo the NREGA. It would like to remove food subsidies (and let the poor rot). It would like to mollycoddle the urban middle class, like Obama does in the US. The party fails to understand that the middle class in the US is really the “lowest class” in the US (it’s a euphemism for the poor), and hence favoring the middle class is a good political strategy. In India, the middle class is actually the “well off” top 15-20%. The aam aadmi is not a middle class fellow….he is a poor rural person….the 80% at the bottom….who the BJP simply doesn’t bother about. In a similar vein, Chetan Bhagat talks about this lowest class of people in last Sunday’s TOI “Open letter to the Indian change seeker”.

I am hopeful now that the extremely rigid and frigid Mr Subba Rao, Governor of RBI, will do his share of the work. He just has to lower interest rates. That will remove any chances of higher inflation. Mr. Rao has to ask himself this: When he lowered interest rates by half % in April 2012. Why did inflation not go up? Why did it actually come down? If his thinking was so perfect, then inflation should have increased, right? Has he got the guts to analyze and accept that there may be a different understanding possible? The art of governance is in trying new things….of constantly improving….not in following decades old theories by rote. Well, Mr. Rao will have his time under the sun at the end of the month. We’ll see if he is capable of courage.

The real truth is that the diesel price hike (as also the Railways price hike) is great for the economy. The Congress government – freed from the burden of partners like the TMC – has shown its liberal economic credentials. And its astuteness in running the economy. It’s clear now. The “paralysis” of the past was imposed on it by its partners. If they had had their way earlier, they would have spurred growth much earlier. They would have had liberal policies in banking, finance, insurance and pension sectors. They would have passed the GST and the Direct Tax code.….

DISCLAIMER : Views expressed above are the author's own.

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I am the Executive Director and CEO of a large media company. I am intolerant of cribbers and support people who find solutions to the problems that surround us. I am liberal minded and secular in belief. My political views emerge from these. I am a strong supporter of the market-oriented economic policies that India is following and believe that we must be single mindedly focused on economic growth – though other problems may need to be resolved along the way as well. I am a strong believer in India’s eventual ascendancy to the top of the world!

I am the Executive Director and CEO of a large media company. I am intolerant of cribbers and support people who find solutions to the problems that surroun. . .